With a team of 33 analysts throughout Asia, Latin America, and Eastern Europe, David Riedel, the president of the Riedel Research Group, digs up and distributes independent research on key developing nations to managers of emerging-market funds around the globe. Riedel spoke with U.S. News about the outlook for infrastructure development in India and what it means for investors. Excerpt:
Is infrastructure growth in India a good trend for investors to play?
Oh, absolutely. If investors are looking for something that is as sure a bet as you can have in the emerging markets, it's the fact that India is going to spend more on infrastructure in the next 10 years than they did in the past 10 years. You can rest assured that the Indian government realizes the lack of infrastructure is a problem. There is a need for hundreds of billions of dollars to be invested in Indian infrastructure, and unfortunately the bureaucratic system is not nimble enough to make that happen, but a lot will be spent and a lot will be built. And it will have a big impact on the companies that are involved, and the country itself. How does India's infrastructure development stack up to that of other key emerging markets, like China?
India has lagged well behind China in developing its infrastructure. Just a couple of anecdotes: There has been no new airport or air travel infrastructure built in India in the past five years—not one new runway, not one new terminal. And in each of those five years, the number of air passengers has increased by 25 percent. Combine that with tremendous pressure on expressways and railways, and what you have is an economy that has really not gotten its act together in terms of investing in infrastructure. What accounts for this gap between India and China?
It really is the government. If you think about India for a second, it's obviously a democracy, but it's a democracy where 77 percent of the population lives in rural situations. So if the politicians are thinking about getting re-elected, their constituency may not care that Mumbai needs another bridge across the port. Or they may not care that Bangalore needs to have a better ring road, because that's not their bread-and-butter issue. Their bread-and-butter issue is farm prices, availability of fertilizer and credit, and all the things that make or break a rural person's life. You don't have that thorny problem of democracy in China, where the central government can choose to allocate resources to what would probably be unpopular projects if it came to the voters. So why would things be any different in the future? What has changed to make infrastructure development a higher priority for India?
First of all, consistent improvement in the Indian economy, which had traditionally grown at 5 or 6 percent a year. A lot of people referred to that as the "Delhi discount," because there was a discount to other Asian growth rates throughout all of the 1990s. That has begun to change, and you've now seen India's growth rate creep up into the 9 and almost 10 percent range, within grasp of China's double-digit growth rates. So you have a pace of economic growth that has picked up to the point that infrastructure constraints are highlighted in a consistent way to businesses and citizens. And now they have some examples of what they need to do. If they look at the telecom infrastructure semiprivatizations that took place in the 1990s, they know that the mobilization of private capital and more entrepreneurial capital can improve services to citizens. And finally, because the growth rate has picked up, the economy has been more healthy, and India has been attracting more foreign direct investment. The rupee has been appreciating, sort of making the whole country itself wealthier and able to afford the kind of investments that are needed. So I think that the next 10 years is a time when this considerable lag in their infrastructure spending can be corrected. The resources are there, the will is there, and the need is there.